Managing cashflow issues with a bridging loan.
Many businesses will have to deal with cashflow issues at some point or other during their existence.
What is a bridging loan?
It’s a short-term loan that lasts up to 12 months. It’s so-named because it’s designed to span the gap between some money going out, and new money coming in. So some people believe they are well-suited to overcoming cashflow problems.
How is a bridging loan different to a fixed-term loan?
The main difference is in how they’re repaid.
A fixed-term loan – such as a mortgage or personal loan – is one in which you pay back the whole amount over equal instalments. When you make the last payment at the end of the term, you’ve repaid everything you borrowed, including interest. The loan may be secured, or unsecured.
With a bridging loan, you only repay the interest each month (and you may have the option to roll-up the interest, and make no repayments at all). But you must repay what you’ve initially borrowed, plus fees, in a lump sum. This can be when the loan ends (at 12 months), or sooner if you have the money available. Bridging loans are secured against property.
Another difference is in how long they last – a bridging loan typically extends to no more than 12 months. Fixed-term loans can be much longer. And, as you might expect, their interest rates may be very different.
Here at Together, we offer both fixed-term loans and bridging loans, as we recognise that both suit different businesses and industries at different times.
How is a bridging loan different to an overdraft?
An overdraft may have no end date, and the interest rate being applied may be much larger than on a bridging loan.
Unlike bridging loans, they are not secured debts.
When could you use a bridging loan?
You may decide to use a bridging loan in several common business circumstances:
- You’ve secured a large new account: If you need to invest in raw materials to complete a large order, or need to hire staff to increase capacity, while waiting for your first invoice to be paid.
- You need to pay an unexpected tax bill: Clearing the bill leaves you free to concentrate on the important task of running your business.
- You need to secure new premises: Whether your business is booming, or just moving, you can use a bridging loan to secure a new site while your old one sells.
- You have up-front expenses to cover: Such as a new shop-fit or the purchase of stock, before you can begin trading from a new outlet.
- Outstanding invoices: If too many clients have bought on credit, or are late in paying their invoices.
When applying for a bridging loan, you’ll be asked to confirm your repayment strategy. This is based on a ‘worst-case’ scenario, when your business is not delivering the returns you need to repay the loan through profits.
Typically, this means agreeing to sell your property in the event you’re unable to repay the loan any other way. That said, you may have alternative means (such as a personal inheritance) that you hope to use to repay the loan.
Lending decisions are subject to an affordability/creditworthiness assessment.
Any property used as security, including your home, may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.